Let me apologize for the delay in this quarterly update. With the elections, interest rate and trade announcements that were coming, I decided to drag my feet and release a Q3 and more update that I believe would hold added relevance.
Equity Markets continued a move forward in the second quarter. However, the gains were quickly undone starting September 20th as the US equity markets peaked and then declined near -10% up to October 29th.
Fear over higher interest rates, poor international markets, and trade tariff talks seemed to fuel the decline.
The valuation bar and expectations for the market remain high, which will allow markets to stumble more quickly when fear is introduced.
As mentioned last quarter, growing concern remains around interest rates and trade tariffs tipping the economy into recession, which leads to cautious optimism of current numbers.
Broad US equity markets moved up nicely in the second quarter, bringing the Wilshire 5000 and S&P 500 price return for the year, up 8.93% and 8.99% respectively. However, the year-to-date gains were quickly taken back as US markets declined near -10% from September 20th to October 29th. Since October 29th the S&P 500 has regained about 3.64% as trade talks seem to be a bit more positive and the election uncertainty was removed. After a bit of a Yo-Yo year, the S&P 500 price return is currently near 2.49% gains for the year (as of 11/12).
While the US markets have been holding on, international markets have been the victim of large uncertainties centered around trade, currency valuation and reduced stimulus. Developed international markets represented by the MSCI EAFE index have declined -10.2% thus far for the year. Emerging markets represented by the MSCI Emerging Market Index have declined -15.7% for the year.
Not surprisingly, bond markets have also been less than inspiring. But they did offer a solid buffer during the larger 10% declines. Year to date the price return of the aggregate bond (I shares core us aggregate bond) has been -4.63%. With the interest re-invested the returns have been -2.43%.
Putting it all together – A look at diversification
In the simplest of terms we like to view the total market in 7 main baskets. US Stocks (Large, Mid and Small Cap), International (developed / emerging) and Bonds. When we look at these major asset class returns for the year we can start to piece together our expectation for management.
Growth Accounts: Growth accounts have made some money in US Stock exposure but are offset by diversification into international. Thankfully we have kept our direct international exposure to under 25%, allowing most of our accounts to perform well relative to many comparable benchmarks.
Income / Moderate Risk Accounts: Income focused and Moderate Risk accounts have certainly fared the best year to date. US Dividend Stocks have kicked into gear and provided solid performance relative to general equity indices. The use of strategic bonds and low international exposure have allowed our moderate and income focused clients to largely outperform comparable benchmarks during the recent declines and year to date.
Conservative Accounts: Our overweight into strategic bonds and dividend stock balance have allowed conservative accounts to tread water near 0 against a backdrop of declining bond prices. While not inspiring, the fact we are near 0 and not losing money should be viewed as a positive. As rates move upward we may have new opportunities to capture higher returns while maintaining a low risk profile. Higher rates may prove very helpful for managing conservative accounts long term.
*Please note, we attempt to give general commentary on how accounts are doing relative to markets for information purposes. Since accounts are customized to your specific needs, your results may differ from above comments. If you need a specific review or have any questions/concerns please give us a call. We are happy to review relative to your specific plan, comparable benchmark, investment period and needs.
What does this mean for my plan?
Not much really. Nothing new is happening that has not happened many times before. After a recent market run up in 2016/2017…taking a step back or pausing should not be a surprise. We have maintained or exceeded most comparable benchmarks, remain in line with long-term goals and feel very good about the value our planning and management have offered. We tend to be very consistent and boring, aiming for proper correlation to markets relative to your risks and plan. Over the past 10 years, our clients have been blessed to see returns that support or exceed planning objectives. When we look out over the next 10-20 years we see no concern that anything new will happen. Of course the events will be different, but the process and output of investing will likely be very similar.
History does not repeat itself, but it often rhymes. – Mark Twain.
We will likely have some really good years, a few mediocre years and an occasional bad one. If we allow time, plans and investments to march on without interruption; then we feel pretty good about the power of investing to keep satisfying your long term needs.
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return – Benjamin Graham
Final Takeaway – Same as last quarter
The economy and markets remain healthy and strong. The market is justified in taking a breather and slowing down price growth as companies produce earnings to catch up to the lofty valuations set forth in January. Uninterrupted, we believe the market will eventually move to new highwater marks in coming years as prices will reflect compounding capital and the strength of companies long term.
However, we are cautiously optimistic given the wealth-stripping effects of higher rates and increased tension around trade. Left unchecked and at the current pace, these could turn the economic tide. Regardless of what transpires, we remain confident in our companies and investments to provide long-term returns relative to investor needs with a certain level of safety. And we remain steadfast in our analysis of these investments to verify sustainability over the next 10 years to provide returns commiserate with planning needs and absorb any turbulence that may come by way of recession or economic surprises.
BIG THANK YOU!!!!
We have noticed a tremendous increase in referrals over the past 2 years. We want to say thank you for the trust you have given us to send your family and friends our way. We believe our team is something special in the industry. It is really nice to see many of you feel the same way.
As we move toward Thanksgiving, we want you to know how thankful our team is to help steward your financial journey. May your family have a blessed Thanksgiving!
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.